Friday 19 January 2018

Emmet Oliver: AIB is facing expensive escape route out of its capital mess

It has been a galling few months for Allied Irish Banks and there is no end in sight to its market mauling.

In fact, the market nightmare actually began two months ago. The bank is believed to have favoured a more scenic route to raising capital than either the Financial Regulator or the Government, but it didn't get its way.

In late March Matthew Elderfield told AIB and the other banks only an 8pc capital level would do, and the money needed to be in place by the end of the year -- no excuses, no derogations.

This 'big bang' approach has left AIB managing director Colm Doherty (above) scrambling around to find the largest amount of capital ever raised by an Irish bank, an astonishing €7.4bn.


Asset sales, rights issues, debt exchanges, institutional placings will all play a part in getting the bank to the magic number, but a capital raising on this scale has never been done before in Irish banking. Doherty is trying to raise capital amounting to over six times the market value of the bank.

The mood at AIB can't be helped by watching Bank of Ireland, at least so far, nimbly navigating its way through an institutional placing, a debt-for-equity swap and now a rights issue.

As AIB chairman Dan O'Connor has said, AIB would prefer almost any outcome than having to sell its overseas assets, particularly Polish unit BZWBK, but needs must.

The deeply humiliating sale of Poland has also been matched by the grim news that the bank has to hand over an 18.6pc stake to the Government, after the European Union stopped the paying of dividends to holders of preference shares.

If AIB's strategic priority a year ago was to remain independent of Government and remain geographically diverse, it needs to revisit its corporate goals.

Even if the bank eventually gets to its €7.4bn target and government control is limited, the bank will be a shrunken, less diverse, less profitable entity.

Even the attempts to sell the overseas assets have run into trouble.

French banking giant BNP has turned its nose up at BZWBK, while Spanish Santander appears to be struggling to seal a complex deal that would result in it buying AIB's M&T (in the United States) stake.

If that deal is not made, the stake will go on the open market, but unfortunately that probably means taking an even bigger discount.

Meanwhile, the Government is watching from the sidelines, waiting to convert its €3.5bn of preference shares into ordinary equity, taking a huge ownership chunk in the process.

Goodbody yesterday said AIB investors were on "tenderhooks'' as the bank struggled to seal a deal on BZWBK or M&T -- and Goodbody is supposed to be the bank's broker.

It all seems an epic, and possibly unwinnable, struggle to keep the Government stake in the bank below a certain threshold.

This may be the end result, but it will come at a huge price for the bank.

Merkel makes futile move on short selling to stymie market

AS ham-fisted, short-selling bans go, the intervention by the German regulator BaFin late on Tuesday night was possibly the worst of the lot.

The ban on naked short selling of bonds and speculative credit default swap trades has no Europe-wide force, can be avoided by subsidiaries of German banks operating in other markets and reduces liquidity in the European bond market at a time when other providers of capital, like US money market funds, are already deserting that market.

The ban, which was heartily endorsed by German Chancellor Angela Merkel, means thousands of hedge funds, money market funds, pension funds, insurance companies, asset managers, private investors and even government agencies operating out of Germany no longer have an option to hedge their exposures to various eurozone bonds. How that helps to increase the amount of money flowing towards desperately cash-strapped peripheral countries like Greece, Spain and Ireland is anyone's guess.

Ireland's ban on short selling of bank shares in September 2008 was equally a failure. It came in September 2008 and initially Irish bank shares soared, but after a few weeks they were touching historic lows, at one point threatening to become literally worthless. The chief outcome of that ban was to reduce liquidity massively in the Irish market -- a fact remarked upon by the chief executive of the Irish stock exchange Deirdre Somers on several occasions.

Of course the credit default swap (CDS) market should be regulated, but on a global basis, preferably with some US involvement. There should be a disclosure of CDS positions for instance and stopping them being entirely 100pc speculative instruments also makes sense.

But Merkel's clunky move hasn't entirely backfired. The markets took such fright at her midnight raid on Tuesday that by yesterday German bond yields were falling, delivering cheaper borrowing costs for the Germans.

Government has got a warning -- the pharma sector is vulnerable

Brian Cowen and Batt O'Keeffe, the new employment minister, have been given an early but unambiguous warning about the threat to Ireland's most resilient exporting industry, high-end branded pharmaceuticals.

The job losses at Pfizer were met this week with something approaching denial -- they were simply the result of a mega-merger of Wyeth and Pfizer and have no wider meaning for Irish economy.

This 'nothing to see here, folks' approach doesn't really wash, though.

Thirteen of the 15 largest pharmaceutical companies have manufacturing bases here, but the number of their generic rivals located here is far smaller.

Generic drug-makers compete more on cost power, rather than brain power and that's why Ireland falls down.

While wages are falling sharply, no matter how competitive Ireland gets, it is unlikely to be able to compete on strictly cost grounds with the likes of China and India, even when we have the added crutch of the 12.5pc corporation tax rate.

What helps Messrs Cowen and O'Keeffe for now is that regulatory standards in these cheaper locations are not as high as they are in Ireland, where the FDA and the Irish Medicines Board prowl the corridors of the main pharma companies.

Nevertheless, the threat from generics to big pharma Irish-style is real, and one suspects some tinkering with the tax regime here for these companies is what is likely to happen next to keep them here.

Irish Independent

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